Bank of England and Federal Reserve ready to shore up struggling economies

The Bank of England has sent the clearest signal yet that it is poised to
restart quantitative easing, as across the Atlantic the Federal Reserve
unleashed fresh measures to shore up America's recovery.

The MPC believes the growth outlook has weakened to such an extent that further stimulus will be neededPhoto: Alamy

Minutes of September's meeting of the Bank's Monetary Policy Committee (MPC) showed the MPC believes the growth outlook has weakened to such an extent that the risks to inflation have "clearly increased" to the downside and that further stimulus would be needed.

"This is a major shift in the MPC's thinking which, until now, had generally been agnostic as to whether extra QE would be needed," said Michael Saunders, economist at Citigroup.

While the MPC stopped short of voting for more QE this month, in Washington the Fed's Open Market Committee (FOMC) announced a new package of policies designed to stimulate the economy by lowering long-term interest rates. In a plan dubbed "Operation Twist", the Fed said it will buy $400bn of US government bonds with longer maturities and sell the same amount of bonds with shorter maturities.

The widely expected move failed to lift Wall Street, where the Dow Jones Industrial Average was down 1pc in late afternoon trading. The FTSE 100 closed 75.3 points lower at 5,288.41.

As in the US, Britain's recovery has so far fallen short of the expectations most City economists had at the start of the year. On Wednesday night, Robert Chote, the head of the Office of Budget Responsibility (OBR), admitted in a speech in Edinburgh that growth has "been weaker than we forecast over the last couple of quarters".

The OBR is expected to lower its growth forecasts for the UK economy for next year when they are published in November.

The shift in thinking at the MPC was also underlined by Spencer Dale, the Bank's chief economist and considered one of the more hawkish officials. In a speech on Wednesday he conceded that "some additional loosening in monetary policy might be needed".

Adam Posen remained the only MPC member to vote last month to extend QE, calling for £50bn of additional purchases. The other eight members including the Bank's Governor Sir Mervyn King voted for no change.

The gloomy outlook for growth over the next year was also echoed by the Fed. In a statement accompanying its decision, the FOMC said that although it expects growth to strengthen there are "significant downside risks to the economic outlook, including strains in global financial markets".

It also said that it would invest the interest payments from the mortgage-backed bonds it has bought over the past two years in similar securities, rather than US government bonds. A third dose of quantitative easing would be politically controversial in the US, with most economists believing it will only happen should the economy deteriorate yet further. Economists warned that the Chancellor is likely to miss his deficit cutting target after public sector borrowing hit a record high for August of £15.9bn. The Treasury insisted it was still on course to meet its target.